According to a report by the Organisation for Economic Co-operation and Development (OECD), the United Kingdom stands out among the G7 countries as the only one experiencing a food price increase of over 10%. This distinctive circumstance introduces intricacy to the economic environment, as the remaining developed nations within the OECD exhibit a deceleration in the average inflation of food prices. The elevated inflation rate in this domain within the UK may present difficulties for both consumers and businesses.
This year’s Autumn Statement was presented amidst more positive economic predictions from the Office for Budget Responsibility (OBR). The OBR now anticipates that the UK economy will be over 2% larger by the beginning of 2024 compared to their previous projections in the Spring. This development is certainly encouraging. While this outcome primarily stems from revised assessments by statisticians regarding the resilience of the UK economy during the COVID-19 pandemic, it also highlights the futility of fixating on minor forecasting discrepancies during these significant political events. Such fixation benefits no one, including readers of The Times, when considering the vast scale of an economy that generates an annual output worth £2.3tn. Instead, it is more prudent to step back after the fact and evaluate whether the Chancellor’s actions align with long-term economic trends or were merely driven by opportunistic electioneering.
Jeremy Hunt deserves a commendable report card for several reasons. Firstly, his emphasis on promoting business investment by implementing permanent full expensing of new plant and machinery addresses the long-standing issue of underinvestment in the UK’s capital stock over the past three decades. This is crucial for the country to break free from its stagnant productivity performance. Secondly, the tax cuts for the self-employed acknowledge the recent reversal in the growth of self-employment since 2020. Failing to address this decline could hinder the labour market’s adaptability to significant economic changes. Thirdly, considering the concerning increase in inactivity among working-age Britons, which has risen by nearly half a million since late 2019, the implementation of a 2p reduction in National Insurance contributes to incentivizing work and bridging the income gap between those employed and those without work. This recognizes that the most effective, albeit challenging, path to economic growth lies in encouraging more working-age Britons to actively seek and secure employment.
The Recruitment and Employment Confederation (REC) has issued a cautionary statement regarding a decline in the demand for permanent hiring in the UK, which is the second fastest rate observed since the onset of the pandemic. Despite an increase in the number of available job candidates, there has been a significant decrease in permanent staff appointments. The Bank of England is closely monitoring these trends in order to identify any signs of persistent inflation, particularly as starting salary inflation has reached its lowest point in 32 months and job vacancies have declined for the second time in three months. The decrease in demand is attributed to economic uncertainty and a slowdown in growth. Neil Carberry, the CEO of the REC, suggests that employers may be postponing their hiring plans until the new year.
However, there were significant areas where the Chancellor chose not to address. One of the most notable omissions was the issue of public sector productivity, which has been a persistent problem for the country’s finances for the past 25 years. Many experts rightly highlight the imminent financial strain on public services, which is expected to worsen after the General Election. This situation is widely seen as unsustainable. If the 5.7 million public sector workers cannot increase their productivity, this strain will become a self-fulfilling prophecy. Laura Trott, the new Chief Secretary to the Treasury and Mr. Hunt’s deputy, faces a monumental task in improving the outcomes of the massive amounts of money allocated to public services each year. While the Prime Minister has spoken positively about the potential of Artificial Intelligence to enhance efficiency and recent calls to return to the office may seem like a step in the right direction, they cannot replace a comprehensive plan that addresses skills, operational efficiencies, and incentivizes capability. This brings us to the most significant and striking data point of all – the UK tax burden is projected to reach its highest level since World War II, at 38% by 2028.
UK landlords are rushing to offload their properties ahead of the halving of tax breaks on investment gains. The upcoming tax year will see the annual capital gains tax allowance decrease to £3,000, a significant drop from the current £6,000. With the burden of higher mortgage rates and punitive property taxes eroding potential profits, a surge of landlords is expected to put their properties on the market in the upcoming year.
Halifax has announced that house prices have risen for the second consecutive month, with a 0.5% increase in November. This comes after a 1.2% increase in October, as lower mortgage rates have bolstered buyer confidence in the face of a limited supply of homes for sale. Economists had predicted a smaller rise of 0.3%, making this increase higher than expected. The average price of a home has gone up by £1,300 to £283,615, which is only 1% lower than last year’s levels. The resilience in house prices is attributed to a scarcity of available properties rather than a significant surge in buyer demand.
In November, there was a 2.9% year-on-year increase in consumer card spending in the UK, as stated in Barclays’ latest UK Consumer Spending Report. However, this figure is still considered weak when compared to the CPIH inflation rate of 4.7%. The report also reveals that 56% of consumers spent money on non-essential items, which is the highest level since April. The surge in spending can be attributed to the Black Friday sales and the arrival of cold weather. Additionally, there has been a significant rise in popularity for Buy Now Pay Later (BNPL) services, with £475m being spent through these services during Black Friday and Cyber Weekend. Despite the increase in card spending, retail sales growth remains sluggish in November, according to the British Retail Consortium.
The aging population and their tendency to vote have made it politically necessary to allocate more funds to age-related public services, resulting in higher taxes. Neither Hunt nor his likely successor, Rachel Reeves, will be able to avoid this reality without implementing substantial changes in how public services are delivered. No amount of luck or political finesse in the Autumn Statements can evade this issue.
When the March Budget arrives, this often-overlooked matter must take center stage.